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Technology Stocks : Gemstar Intl (GMST) -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (6331)	3/3/2004 12:24:44 PM
From: 100cfm	Read Replies (1) \| Respond to of 6516

Mike, Pretty grim reading.<g> The projected operating loss of 438 to 458M does include depreciation amortization which in 03 was 173M. This is a non cash expense. Using the 03 amount of 173M, the actual cash loss would be 265-285M not including write down of intangible assets which in 03 was 416M. The press release didn't mention that the operating income of 44-69M included write down of intangible assets. From your numbers there seems to only be aprox 300M left in intangible assets. The question is are they writing off the balance of the intangible assets? Another non-cash expense. What I'm trying to determine with great difficulty is what is the company doing profit or loss wise without any of the non cash write offs. Revenues minus cost of goods,SGA, legal,intrest and taxes. One quick calculation based on the 03 consolidated statement would be. (For Sat revs I'm using $40/mth * 236,000 subscribers) 878m revenues (assumming no decline in 04) (113M) loss of satellite revs from sale to Echo Star ( 6M) intrest expense ( 42M) stock compensation (885M) operating expenses (assuming 03 level) _______ 168M cash loss To back into the 44-69M OP profit, I'm doing the following. (168) cash loss (175) A&D ______ 373M in write offs That leaves 60-80M more in unaccounted losses. (433-458M OPloss-373M) Are they losing 168M or 228-248M in cash this year. Without knowing how much of intangible assetts they are writing off we can't get an answer. I'll listen to the CC to see if they mention it. Either way, not pretty. If all the above makes no sense, it's OK cause it's made my head spin.<g>

To: Mike Buckley who wrote (6331)	3/3/2004 1:37:04 PM
From: Mike Buckley	Respond to of 6516

A minor correction to my post: intangible assets were devalued another $589 million last year They were devalued $567 million, not $589 million. Sorry about that. --Mike Buckley

To: Mike Buckley who wrote (6331)	3/3/2004 10:15:13 PM
From: Mike Buckley	Read Replies (2) \| Respond to of 6516

Sometimes I can be such a dummy without even trying. Imagine how dumb I could appear if I tried! Now that I've listened to the conference call, I've got a very different impression of the earnings press release, somewhat because I realize how dumb I've been. (Have I mentioned that? :) First, I learned that only $190 million of the $238 million deal with Echostar pertains to the licensing agreement. The balance is for the sale of SNG. So, the Comcast, Echostar and Pioneer upfront payments allocated to licensing totals $454 million. Most important -- and the sad thing is that it's not as if I didn't already know this -- the upfront licensing payments by the three companies will be straight-line amortized over the term of the deals. Management won't disclose the term other than to say they are long-term deals. I'm gonna assume an average of 10 years. So, back to management's projected 2004 operating profit of $44 million to $69 million. There are no one-time payments to exclude because that profit includes only the accrued portion of the payments. If my guess about the term of the contracts is reasonably good, that operating profit assumes only 10% of the one-time licensing payments is accrued next year, leaving 90% to be accrued over the following nine years. That means management is projecting another year of dramatic improvement in net operating revenue. Even without my estimate of $45 million in accrued licensing fees from the three companies, the net operating revenue would be in a much improved range of a loss of only $1 million to a profit of $24 million. That continues to be an incredible improvement (compared to operating losses of $625 million and $2.7 billion in 2003 and 2002, respectively.) I even got some important clarification about the free cash flow. Remember that the free cash flow obtained from the press release is negative $10.6 million. I learned from the conference call that there are three one-time outflows related to settlements with DOJ, Fantasy Sports Property and another company whose name I didn't comprehend. Including a tax benefit related to those outflows, the net one-time outflow totals $32.3 million. Excluding those one-time payments, the free cash flow is $21.7 million. To put that in perspective, though 2003 FCF excluding one-time outflows is positive -- not negative -- it's still a continuation of the awful trend of dramatically decreasing FCF. The company will apply to the insurance company for total reimbursement of the $68 million settlement of the shareholder suit. IF that comes through, that would be nice. Regarding legal expenses, management expects it to be at least a couple more years before it gets back to normal. Naturally, a lot about that hinges on the pending litigation. Regarding the math 100 was trying to do relative to the loss of SNG revenue: Management clearly stated twice that the loss of earnings due to the sale of SNG will be "completely offset" by the earnings from the recently announced deals. Regarding whether or not to expect continued asset impairment in the future: The CEO commented that the long-term deterioration of certain Gemstar businesses correlate with the asset impairment. My conclusion is that that is his nice way of saying that as those businesses continue to decline, the value of the related assets will have to be devalued. However, remember that management has already built estimated asset impairment into the model that estimates a $44 million to $69 million operating profit next year. Regarding the Comcast joint venture, management clarified that the deal allows Gemstar to keep all pre-existing revenue streams yet allows the company to share IPG development costs. Tinker has mentioned on the Motley Fool thread that he believed the Comcast licensing deal was similar to the Time Warner deal, the exception being that Comcast agreed to pay an upfront licensing fee whereas TW agreed to pay over time. The CEO confirmed that Tinker is right about comparing the two deals. Regarding the balance sheet, management expects to have about $350 million to $500 million in cash after the one-time payments from the three companies are received. That's an improvement of only $100 million to $250 million despite that the one-time payments total $502 million. I haven't taken the time to figure out where the balance of the those revenues might get eaten up. Advertising, which is presumably everybody's favorite subject because it's got the greatest growth potential: Management says there will be no significant IPG advertising in 2004. Management assessed the situation that the company has to start from scratch to develop the advertising vehicle and the mechanism for measuring it. The TV Games network is now large enough that it can begin to develop advertising revenue (rather than rely solely on wagering revenue.) In summary, after listening to the conference call and having come to my senses regarding amortization of the one-time licensing fees, I have reversed my thinking expressed in my previous posts about next year's estimated operating profit; it reflects continued improvement and is not to be considered a one-time event. Regarding my thinking about the free cash flow, though I'm glad to see that some one-time outflows created the negative FCF in 2003, my concern remains every bit as serious that free cash flow has continued to seriously decline. Even though free cash flow will improve dramatically next year due to the one-time licensing payments recently negotiated, that will likely be a one-time bump that probably won't be repeated in the near-term future unless two of the remaining top ten cable companies sign a licensing deal. And though I didn't mention advertising revenue in my previous posts, the conference call confirmed my thinking that any serious advertising revenue is a LONG way off. --Mike Buckley